The Meaning of Contract Execution
The word "execute" derives from the Latin term exsequi, meaning "to follow out or perform." Merriam-Webster defines "execute" as "to carry out fully." Legally, to "execute" a contract is to put it into effect and to do all that is necessary for it to be enforceable in a court of law. To execute a contract means to enter into an agreement; to sign a contract or to follow through with what the contract stipulates.
Essentially , the execution phase of the contract lifecycle is the part where you enter into a legally binding agreement and take on the obligations and expectations laid out within the contract.
Execution of a contract is the final stage in the contract lifecycle. When a supplier accepts terms offered by a customer, which is also called offer or proposal acceptance, the contract reaches the execution stage. At "execution," both parties make the contract binding on themselves. After signing or verbally accepting a contract, the customer is obligated to fulfill its contractual duties, and the supplier has an obligation to provide its goods or services.
The Law of Contract Execution
Executing a contract is often the last hurdle to be overcome before the deal can be concluded, and may seem like a mere formality that couldn’t possibly have any legal implications. This section sets out the legal framework in which contract execution takes place, including any legal requirements or formalities that must be followed for the contract to be enforceable.
In South Africa, the general requirement is that a contract is concluded once the necessary elements of a valid contract are concluded and there are no defences to its enforcement. These elements are the following: However, a valid contract may not be enforced if it is affected by a defect in its formation or if it is prohibited. It is only once a contract is valid and enforceable that it requires execution in order to have full effect.
The execution formalities depending on the nature of the contract and the nature of the parties. For example, a contract for the sale of land must be executed in writing; where one party is a partnership, the business must have been represented by a partner; where the transaction is for an estate agency commission it is essential that the contract be in writing; and if the contract is a suretyship, it must comply with the formalities prescribed by the Alienation of Land Act.
The Companies Act requires that all contracts entered into by a company must, in principle, be signed by the company by a prescribed manner. However, a failure to follow those prescribed manner would not affect the contract, unless the non-compliance resulted in a material defect in the contract, such as: Any breach of these principles is a material defect in the contract a breach of which can result in non-performance, provided that the breach is not cured by ratification or human error.
Ratification Any requirement to execute the agreement ‘on behalf of’ the company may always be waived by the company; which is known as ratification. Until such time as the agreement is ratified, the signatory of the contract is bound. Once the contract is ratified, the company will be responsible for its obligations as if the proper representatives had signed it. Due to the significant impact that the execution of the contract representative has on the validity of the contract, this represents a significant commercial risk for the parties.
Human error In the event of human error, a court may change the execution to reflect the true intention of the parties, provided that: The change of the execution will not be treated as a fresh contract or invalidating the contract.
How to Properly Execute a Contract
Perhaps the most important thing you should learn is that there is no single "correct" way to execute a contract. Again, a contract requires mutual consent. What contractual terms mean as a matter of law is established by courts, arbitration panels, and the like. The issue of whether a contract exists at all is not so simple.
Formalities aside, the most important requirements for preparation and execution of a contract are (1) an agreement between the parties, (2) a person who has authority to bind each party and (3) the capacity of each party to enter into a binding contract. Here is a summary of typical steps executed in preparing and signing a contract:
- Drafting
- Negotiating
- Counter-Offering
- Accepting the Offer
- Signing of the Contract
- Left/Right Hand Rule
- Cross-Outs
- Initialing
- Stamping
- Copies
- Retention of the Original
Common Errors in Contract Execution
The process of executing a contract is relatively straightforward. Or so it seems. While it is relatively simple and quick to sign off on a contract or have it signed by a counterparty, it is sufficient to merely make an agreement legal and binding upon them. The individual should be aware however, that there are some significant common errors in the execution of contracts. All of them can be avoided if one has the right knowledge of the law pertaining to these issues. One of the leading ways in which people make errors when executing contracts is by failing to incorporate the name of the party executing the contract. Without an objection as to the identification of parties at the execution stage of a disagreement, the presumption is that both parties are intended to be linked by the contract and as such are linked thereto. A related issue is the signature of person itself . In such situations a party will be presumptively bound in law by that which is signed, to include that which is incorporated into the text of the contract by reference. Hence, the party must then observe all of the circumstances of the signing to determine the efficacy of the signature. If it is the signature of the company, an executive appearing to act within the confines of the authority as the company is lawfully bound to, the company will be bound. If not, the party would not be bound. And finally, another error derives from failing to account for the representative of the party. While such a representative may sign for the party, in so doing they may not constitute the legislation required to bind them as they are but a representative of the agency. As such, they may not be able to link themselves or others to their agency unless a power of attorney or equivalent authorisation is provided.
Legal Ramifications for Improper Execution
One of the most important aspects of executing a contract is not only doing so in a formal and proper manner, but also ensuring that you have the full power and authorization to execute it. Even the best written and negotiated contract will be ineffective if it has been improperly signed. The first consequence of improper execution is the document may be void – meaning that in the eyes of the law, the contract never existed. In some cases, even if the properly authorized party knows of the defect, the contract could be enforceable if that party still performs its obligations under the contract. For instance, if the unauthorized party knows the signature or execution was not proper, but continues to send and receive payments, the courts may still find the contract to be enforceable. However, this may not be the case if general principals of agency law apply. For instance, if the signature differs from a normal signature, and is not properly approved, without more evidence you may be able to claim that you never authorized the contract in the first place, and that you are not responsible for its obligations. In instances where the contract document is void, some jurisdictions also allow for recovery of valuable expenses incurred in reliance on the contract, which often takes the form of "reliance damages." Other jurisdictions employ both the doctrine of "unjust enrichment" and award "restitution damages," which is different from reliance damages. Unjust enrichment is based on a party being unjustly enriched at the expense of another party. Restitution is a derivative of unjust enrichment, in that regardless of whether a party has been harmed, a person who has unjustly received a benefit at the expense of another may be required to repay that person or entity for the "benefit" received. Thus, even if a party is not damaged, but has received something (in cash, debt forgiveness, a service tax or labor, or other form of value) that it should not have received, such that it would be unjust for the party to retain it, recovery of such value should be available under the theory of "unjust enrichment." Similarly, a party may be required to return any "material" benefits it has acquired through the reliance on the void contract, by way of restitution, generally calculated by benefit conferred on the party invoking it. The benefit from either unjust enrichment or restitution theories is typically the amount "unjustly" received. Another possible effect of an improperly executed contract is that it creates mere "conditional rights", which means that the party may rely on provisions of the contract, but the contract remains ineffective and void. Most courts will not enforce conditional rights, so the party who does not hold those rights is released from its obligations. Another potential consequence is that the contract is merely voidable by the other party, and remains in effect, despite the lack of proper execution or authorization. If the principal party properly authorized the signatory to execute the contract, the mere failure of the agent to actually execute the contract does not void the contract. However, if the principal party fails to authorized the agent, agency laws may apply, and the agent suspends his or her authority to bind the principal. Lastly, if there is a known defect, and the contract is performed, the court may disregard the defect and uphold the contract, if that would not contravene the terms of the contract itself. However, the party whose rights or duties are affected by the defects must also accept and consider the contract to be valid, otherwise the concepts of justifiable reliance and ratification may not apply.
Contract Execution: Best Practices
The following best practices will help avoid confusion and save time during the contract execution stage:
Collect Necessary Information Early
It is not possible to negotiate a contract if the parties do not understand the key terms of the contract or the capabilities of their systems. Time spent at the beginning of the contract process is well spent and may minimize back and forth later in the process. For example, in the context of licensing intellectual property on a software platform, it is often necessary to understand the technical flow of the document and the data fields that exist within the system. An efficient manner to address this matter is to have the document designer present at the outset of the licensing process or to review the design documents that detail the system .
Ensure Adequate Internal Review
Having a good working relationship with the IT team will assist you in ensuring that the system is capable of executing the terms of the contract so that the company can fulfill its obligations efficiently and economically. In addition, all legal issues should be identified and discussed so that they can be addressed as part of the contract between the parties.
Obtain Signed Copies
Often there can be several rounds of re-execution on a contract. Make sure it is a habit to assemble all signed copies of the contract in one place so that there is no question as to when a contract is effective. In addition, once the signed contract is executed, send the counterparty a request to confirm that we have the correct version of the document.